Australia's big banks focus on job cuts as inquiry looms

SYDNEY (Reuters) - Australia’s big banks are responding to a revenue crunch by cutting jobs and other costs, prompting fears on the eve of an inquiry into their businesses that the industry’s tarnished reputation is about to take another hit.

Regulators’ demands that banks hold more capital and their scrutiny into internal operations have made cost-cuts the in-vogue metric at the so-called Big Four banks, Australia and New Zealand Banking Group (ANZ.AX), Commonwealth Bank of Australia (CBA.AX), National Australia Bank (NAB.AX) and Westpac Banking Corp (WBC.AX), to boost profits.

But the strategic change will come at a cost for the banks.

“If you can be the most successful at bringing your staff numbers down the quickest, that’s going to give you the quickest cost advantage,” said one senior bank insider with direct knowledge of the cost-cutting strategy.

But, added the insider, who requested anonymity because he was not authorised to speak to the media, as jobs cuts mount, “society and the community will push back, won’t accept it.”

Cost cuts are not limited to jobs, with banks preparing to make use of improved technology to reengineer back office functions, and reduce the number and physical size of their branches.

But the insider said he expected the Big Four to shed up to 40,000 jobs over five years as part of that overhaul, making a reduced wages bill the primary saving.

The focus on costs coincides with the start of a royal commission looking into misconduct in the financial sector starting Monday.

Scandals that have shaken public confidence include allegations of interest rate rigging, claims of a toxic trading room culture within some banks, and accusations that some institutions withheld legitimate health insurance payouts and gave misleading financial advice.

The inquiry, expected to last a year and which can recommend criminal charges and legislative changes, could potentially result in restrictions that affect bank profits, similar to a government-imposed bank tax levied last year.

SLIMMING DOWN

According to the government, Australia’s big four are still among the most profitable banks in the world, earning net profit margins of 36.4 percent in the June quarter of 2017.

Years of economic growth and a booming property market had encouraged executives to focus on lifting sales rather than trimming operations. “Top line revenue growth is going to be a struggle, so they need to look closely at their cost lines really seriously,” said Brad Potter, head of Australian equities at Nikko Asset Management, which owns shares in the major banks.

“This is just early stages for banks,” Potter said. “There needs to be a massive reengineering of back-offices to cut costs.”

Last week, CBA’s outgoing chief executive, Ian Narev, warned that over the next five years, “the level of competition in this industry will simply not sustain the cost structures we’ve got today.”

Narev will leave CBA in April as it fights accusations by the country’s anti-money laundering agency that it allowed thousands of suspicious transactions to pass through its systems. Job cuts could prove hard for banks given the trust they have lost in recent scandals, according to Julia Angrisano, national secretary of the Australian Finance Sector Union.

“Rather than going through this stage with a sledge-hammer to shed tens of thousand of jobs, we think that this is an opportunity for banks to deal with disruption in the right way, re-skilling and re-training their workforce,” Angrisano said.

NAB last year said it would cut 6,000 jobs over the next three years in a bid to save A$1 billion by 2020 through automating processes while also creating 2,000 new staff positions over the same period.

Branches are a key focus for cost-sensitive executives as more people bank online.

“It’s likely we will see branch layouts, sizes and experiences evolve, but they continue to play a pivotal role in the experience our customers have,” NAB’s chief operating officer, Antony Cahill, said in an email to Reuters.

A spokeswoman for Westpac said the bank believed staffing numbers would fall, but that it was taking a gradual approach. ANZ representatives did not respond to emailed questions about staff cuts. A spokesman for CBA declined to comment beyond Narev’s remarks last week.